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Graham Summers’ Weekly Market Forecast (Major Resistance Edition)
Having
rallied virtually non-stop since the beginning of September, stocks are now
about to come up against MAJOR long-term resistance in the form of the 200-week
moving average.
As you can
see, the S&P 500’s break below the 200-week moving average was what
heralded the beginning of SERIOUS trouble for stocks in 2008. And since the
Crash, it has acted as THE line of resistance for stocks’ rally. Indeed, it
stopped stocks dead in their tracks at the April 2010 top.
Below is a
close-up of the market’s action for the April top through today. As you can
see, we’re about 12 points off from the 200-week moving average. Bear in mind,
we don’t necessarily need to touch
the line (we didn’t in April), so as of right now stocks are in danger of a
severe reversal at any time.
This ties in
with my view that stocks have been forming a bearish rising wedge: a classic
topping pattern. As pointed out in
last week’s forecast, this was precisely the same pattern we saw in the July
rally. That pattern, when broken, saw stocks falling nearly to their base. If
this current pattern breaks in a similar fashion, we should see the S&P 500
back at 1,060 relatively quickly. I’ve included both patterns in the below
chart:
Aside from this,
we also have resistance at 1,190, which adds to the potential for a reversal
here. Does, this doesn’t mean we’re looking at a full-scale collapse right
away? Not necessarily. Because of its “stair-step” fashion, this rally has
built up a series of support lines which all offer the potential for a bounce.
So once the bearish rising wedge breaks, the collapse doesn’t have to be
sudden.
We’re also
getting signs that stocks are prime for a reversal from the US Dollar. As
stated last week, the S&P 500 is now trading in near perfect inverse
correlation to the US Dollar. With that in mind, we need to consider that the
US Dollar may in fact be putting in a bottom here.
As you can
see, the US Dollar looks to have just bounced off of its multi-year trend line.
The trillion dollar question is: is this a dead cat bounce… or the start of
something more? To some degree, it doesn’t matter as the anti-Dollar trade is
so lopsided that even a small pop
in price could induce a serious short-covering spree (traders have
placed a record number of bearish Dollar bets).
One easy
means of determining whether this is the start of something bigger is the
20-day exponential moving average.
As the below chart shows, this line has served as a decent proxy for collapses/
significant rallies. If the US Dollar breaks above this line, we’re likely
going to 81 before it turns down again.
In the
context of all of this (stocks coming up against their 200-week moving average,
the rising bearish wedge pattern, a US Dollar reversal), the downside risk for
stocks here is VERY, VERY high (as in April 2010 high).
Remember,
ALL of this latest rally’s gains have been based on rumor and insinuation that
the Federal Reserve is about to announce a MASSIVE ($1 trillion or so) QE 2
program at its November 3 meeting. If the Fed DOESN’T announce such a program
or disappoints Wall Street by announcing a smaller program, stocks could
absolutely COLLAPSE.
However,
until the Fed’s November 3 meeting, the likelihood of a full-scale collapse isn’t
high. Indeed, the Fed has POMOs (its ongoing QE lite program) on Tuesday and
Thursday this week, so we could easily see intraday ramp jobs on those days.
Good
Trading!
Graham Summers
PS. If
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Just to rub it in our faces, they`ll close the S&P at 1199.999 today (just to leave us bears something to cling to for a few more hours). Tomorrow, they`ll line up all the shorts against the wall and open fire (again). Same old, same old...
Enjoy your sleep everyone...
Market holding up quite well against this resistance.
Dow passed it easily severl days ago.
Remember, ALL of this latest rally’s gains have been based on rumor and insinuation that the Federal Reserve is about to announce a MASSIVE ($1 trillion or so) QE 2 program at its November 3 meeting. If the Fed DOESN’T announce such a program or disappoints Wall Street by announcing a smaller program, stocks could absolutely COLLAPSE.
Can there be any doubt with GE & GS touting buying equities instead of bonds and gold?
http://www.cnbc.com/id/39436303
In two words, wealth transfer
.
"Having rallied virtually non-stop since the beginning of September..."
Given all this, it seems implausible that the S&P rallies only another 12 points, ricochets off the 200d MA and heads straight back down. If things were to unfold in this manner, I'd really have to question the intelligence of everyone involved. Although I may not agree with it, I understand why they want the markets up. In an effort to prevent another selloff like we saw in May, they'll bloody well make sure we rally hard through this supposed level of resistance this time around. Based on what has happened in the last 7 weeks or so, I am not convinced there will be much resistance at all. In fact, I'd bet we'll see the opposite occur with buying/short covering increasing as we get close to breaking this threshold as we have seen at previous resistance points (or what was supposed to be resistance) over the last several weeks. If this level of resistance is in fact breached, the likelihood of it forming a new level of support only increases as the rally continues. Next thing you know, we're bouncing off 1300 back down to 1200 (as some sort of a correction is needed) prior to making a run at the April 2008 highs.
"Everybody is a trader at market bottoms, everybody is an investor at market tops"
Classic group psychology - traders extrapolating the past trend into the future. It works with physics, but with people.........? :D
What ever is coming, when ever it's coming, it will be fast and furious, followed by massive liquidity injections, in that "strength", sell some more! That's IT!
Technically looks like a nice setup for shorting, however circumstances are not normal.
Informative post. Thank you.
Won't get the selloff till sometime next week, guessing after the Fed meeting when they announce instead of "shock and awe" they will merely buy 100-150 billion a month till they get the reaction they want.
Much good chartology. I coulda told ya that S&P 1200 is a wall. And the US Dollar is oversold. Combine those two facts and you have yourself a rising dollar, and falling stock and commodity prices.
On the other hand, this is a developing bubble in stocks, so, who knows?
Brilliant LT perspective while many push the ST market mind manipulation.
LT, gold support may be 922.
http://stockcharts.com/h-sc/ui
http://www.infowars.com/
multiple 503 service interruptions today on ZH
.